Kindred Healthcare Reports Second Quarter 2017 Results

Consolidated Revenues of $1.53 Billion, GAAP Loss from Continuing
Operations of $108 Million(1),
GAAP Diluted Loss Per Share from Continuing Operations of $1.36(1)
and EBITDAR of $36 Million(2) in
the Second Quarter

Results Reflect After-Tax Costs of $136 Million Primarily Related
to Non-Cash Impairments of $82 Million and a Non-Cash Deferred Tax Asset
Valuation Allowance of $37 Million

Core EBITDAR of $198 Million(3)
and Core Diluted EPS from Continuing Operations of $0.19(3)
in the Second Quarter

LOUISVILLE, Ky.--(BUSINESS WIRE)--Kindred Healthcare, Inc. (“Kindred” or the “Company”) (NYSE:KND) today
announced its operating results for the second quarter ended June 30,
2017.

Benjamin A. Breier, President and Chief Executive Officer of the
Company, commented, “We are pleased to report strong second quarter
operating results in line with expectations. We made solid progress
growing our Kindred at Home and Kindred Rehabilitation Services
divisions. Strong top line growth and another sequential decline in
labor costs drove increased profitability in both businesses. The growth
in these businesses, solid cash flow performance and our enterprise-wide
cost realignment initiatives position Kindred for future success.”

Mr. Breier continued, “The second quarter was a historical one for
Kindred, marked by the execution of the definitive agreement to sell our
skilled nursing facility business. After more than two decades of
nursing center operations, this announcement clears the way to closing
that chapter of Kindred’s story, and turns the page to the future of
integrated post-acute care. We expect these sales to be completed by the
end of 2017, and believe they will significantly enhance shareholder
value and increase our focus on higher margin, faster growing and less
capital intensive businesses, all of which will increase the fundamental
cash generating capacity of our enterprise.”

Mr. Breier added, “Our Hospital Division continued to advance its
mitigation strategy, navigating through its third full quarter of
long-term acute care (“LTAC”) patient criteria. Operating results were
largely in line with our previously stated expectations. LTAC compliant
revenue increased to 88% from 86% in the first quarter. Managed care and
commercial volumes increased 8.2% for the second quarter of 2017 on a
same-hospital basis as compared to the prior year period.”

Mr. Breier noted, “Kindred’s Hospital Division continues to advance its
portfolio optimization initiative with the pending closure of five
additional non-strategic LTAC hospitals. As announced earlier this week,
Kindred is converting one of those LTAC hospitals in Indianapolis,
Indiana into an inpatient rehabilitation facility (“IRF”) joint venture
with Community Health Network. We expect to further optimize our LTAC
portfolio with additional closures, consolidations and IRF conversions
over the coming quarters.”

See reconciliation of GAAP results to non-GAAP results beginning on
page 14. During the first quarter of 2017, the Company revised its
definition of “core” non-GAAP measures. See “Non-GAAP Measures”
beginning on page 14 for a discussion regarding the revised
definitions. For comparability, core results for 2016 have been
revised to conform to the current year presentation.

Mr. Breier concluded, “We are very proud of the progress our teammates
made over the first half of the year. Advancing our exit from the
skilled nursing facility business in its entirety, working through our
LTAC patient criteria mitigation strategy, and growing our Kindred at
Home and Kindred Rehabilitation Services divisions set the stage for
additional progress in the coming quarters. As detailed in the 2017 and
2018 Outlook section below, we expect these efforts to result in
financial performance next year of approximately $6.2 billion of
revenue, $830 million of Core EBITDAR, $0.80 of Core diluted earnings
per share (“EPS”) from continuing operations, and a midpoint expectation
of $180 million of Core free cash flows and cash benefits from
utilization of net operating losses (“NOLs”)(1). I would like
to extend my deep appreciation and sincere thanks to the thousands of
caregivers and teammates whose contribution is critical to improving the
lives of the more than one million patients we care for each year.”

All financial and statistical information included in this earnings
release reflects the continuing operations of the Company’s businesses
for all periods presented unless otherwise indicated. As a result of
developments in the second quarter of 2017 related to the planned
divestiture of the Company’s skilled nursing facility business, the
operating results, direct overhead and losses associated with this
business were classified, for accounting purposes, as discontinued
operations for all periods presented. These changes include the transfer
of profits from applicable RehabCare contracts servicing the Company’s
skilled nursing facility business to discontinued operations, but do not
include any allocations of indirect overhead related to the skilled
nursing facility business. In addition, the Company has reclassified
certain retained businesses and expenses previously reported in the
Nursing Center Division to other business segments in continuing
operations for all periods presented.

Second Quarter Consolidated Results(2):

Consolidated revenues were $1.53 billion, a 4.6% year-over-year
decrease, primarily attributable to the impact of the transition to
LTAC patient criteria and the sale or closure of 16 LTAC hospitals
primarily during the second half of 2016. GAAP loss from continuing
operations was $108.2 million compared to income of $28.0 million in
the same period a year ago, primarily due to a $129.7 million pretax
increase in impairment charges, a deferred tax asset valuation
allowance of $36.7 million, a $25.3 million pretax charge for certain
RehabCare contract terminations for non-payment and related collection
litigation (“RehabCare Collection Litigation”) and the impact of LTAC
patient criteria. Core EBITDAR declined to $198.0 million compared to
$228.2 million in the same period of 2016, primarily due to LTAC
patient criteria and the sale or closure of the 16 LTAC hospitals
noted above.

GAAP operating cash flows were $92.7 million compared to $135.2
million for the same period a year ago. Core operating cash flows were
$92.3 million compared to $126.3 million for the same period a year
ago. Core free cash flows were $62.4 million compared to $83.3 million
in the same period a year ago. GAAP operating cash flows, Core
operating cash flows and Core free cash flows declined compared to the
prior year period primarily due to LTAC patient criteria and an
increase in net working capital in the second quarter of 2017 compared
to the prior year period.

GAAP diluted loss per share from continuing operations was $1.36 as
compared to GAAP diluted EPS from continuing operations of $0.21 a
year ago. This decrease was primarily due to an increase in impairment
charges, a deferred tax asset valuation allowance of $36.7 million, a
provision for the RehabCare Collection Litigation and LTAC patient
criteria. Core diluted EPS from continuing operations was $0.19 as
compared to $0.33 for the same period last year. The decline in Core
diluted EPS was primarily attributable to LTAC patient criteria.

The Company recorded a pretax $134.6 million non-cash impairment
charge in the second quarter to reflect the write-off of the full
carrying value of RehabCare trade name and customer contract
intangible assets based upon various factors, including the estimated
reduction in earnings resulting from the previously announced
definitive agreement to dispose of the Company’s skilled nursing
facility business and the impact of the RehabCare Collection
Litigation.

Second Quarter Segment Results(2)(3):

Our Kindred at Home Division, which comprises the Company’s home health,
hospice, community care and home-based primary care businesses, recorded
second quarter revenues that increased 3.2% over the prior year period
to $644.5 million. On a

__________

(1)

See “2017 and 2018 Outlook” below for further details. All
forward-looking non-GAAP financial measures are provided only on a
non-GAAP basis due to the inherent difficulty of forecasting the
timing or amount of items that would be included in the most
directly comparable forward-looking GAAP financial measures. As a
result, reconciliation of the forward-looking non-GAAP measures to
GAAP financial measures is not available without unreasonable effort
and the Company is unable to assess the probable significance of the
unavailable information.

(2)

See reconciliation of GAAP results to non-GAAP results beginning on
page 14. During the first quarter of 2017, the Company revised its
definition of “core” non-GAAP measures. See “Non-GAAP Measures”
beginning on page 14 for a discussion regarding the revised
definitions. For comparability, core results for 2016 have been
revised to conform to the current year presentation.

(3)

See full segment data on pages 9 through 13.

Second Quarter Segment Results(1)(2)(3)(Continued):

same-store basis, home health admissions increased 2.8% and episodic
admissions were flat while same-store hospice admissions declined 3.0%
over the prior year period. Segment adjusted operating income and Core
EBITDAR increased 1.9% and 1.3%, respectively, for the second quarter of
2017 as compared to the prior year period. Home health direct labor
costs per visit declined 3.0% and hospice direct labor costs per patient
day declined 1.8% in the second quarter of 2017 both as compared to the
first quarter of 2017.

Kindred’s Hospital Division second quarter revenues declined to $540.8
million from $645.4 million in the prior year period primarily due to
the elimination of approximately $70 million of revenue related to the
sale or closure of the 16 LTAC hospitals primarily during the second
half of 2016, the impact of LTAC patient criteria and a 2.0% decline in
same-hospital admissions compared to last year. For the second quarter
of 2017, approximately 88% (92% excluding Texas LTAC hospitals) of
same-hospital revenue came from LTAC compliant patients, which include
all patients except Medicare site neutral patients, an increase from
approximately 86% (89% excluding Texas LTAC hospitals) in the first
quarter of 2017. Same-hospital managed care and commercial volumes
increased 8.2% in the second quarter of 2017 compared to the prior year
period. Segment adjusted operating income and Core EBITDAR for the
second quarter declined to $91.6 million and $90.6 million,
respectively, compared to $127.5 million for both Segment adjusted
operating income and Core EBITDAR a year ago. The declines were
primarily due to the elimination of approximately $8 million of Segment
adjusted operating income and Core EBITDAR related to the sale or
closure of the 16 LTAC hospitals noted above, the impact of LTAC patient
criteria, and increases in labor and other costs.

Kindred Rehabilitation Services increased second quarter revenues by
2.2% to $369.3 million as compared to $361.3 million in the prior year
period. Segment adjusted operating income decreased to $36.1 million as
compared to $58.1 million in the prior year period, primarily as a
result of the RehabCare Collection Litigation. Core EBITDAR increased to
$61.4 million as compared to $58.1 million in the prior year period. The
Kindred Hospital Rehabilitation Services segment achieved revenue growth
of 4.3% to $178.4 million, and Segment adjusted operating income and
Core EBITDAR both grew to $53.4 million, an increase of 5.3% compared to
the same period a year ago, as a result of the development of new IRFs
and a 6.7% increase in revenue per discharge while same-IRF discharges
were flat compared to prior year. RehabCare revenues increased 0.4% to
$190.9 million for the second quarter. RehabCare Segment adjusted
operating income (loss) decreased to a loss of $17.3 million compared to
income of $7.4 million in the prior year period, primarily due to the
RehabCare Collection Litigation. RehabCare Core EBITDAR increased 8.7%
to $8.0 million primarily due to cost reduction initiatives and efforts
to terminate unprofitable contracts, partially offset by census decline
and wage rate pressure.

During the second quarter of 2017, the Company recorded $288.8 million
of pretax charges related to the planned divestiture of its skilled
nursing facility business, including a $262.3 million lease termination
accrual, $18.0 million of transaction costs and $8.5 million of
retention costs.

2017 and 2018 Outlook(4)

All forward-looking non-GAAP financial measures used to provide “2017
Outlook” and “2018 Outlook” (collectively, “Outlook”) are provided only
on a non-GAAP basis. This is due to the inherent difficulty of
forecasting the timing or amount of items that would be included in the
most directly comparable forward-looking GAAP financial measures. As a
result, reconciliation of the forward-looking non-GAAP financial
measures to GAAP financial measures is not available without
unreasonable effort and the Company is unable to assess the probable
significance of the unavailable information.

The Company’s Outlook does not take into account the effect of any
reimbursement changes, any further acquisitions or divestitures, and any
further issuances or repurchases of common stock.

__________

(1)

See reconciliation of GAAP results to non-GAAP results beginning on
page 14. During the first quarter of 2017, the Company revised its
definition of “core” non-GAAP measures. See “Non-GAAP Measures”
beginning on page 14 for a discussion regarding the revised
definitions. For comparability, core results for 2016 have been
revised to conform to the current year presentation.

(2)

See same-hospital and full segment data on pages 9 through 13.

(3)

For each of the Company’s segments, Segment adjusted operating
income (loss) is a measure of performance used by the Company’s
chief operating decision makers in accordance with “Accounting
Standard Codification 280 – Segment Reporting.” The Company defines
Segment adjusted operating income (loss) as EBITDAR, excluding
litigation contingency expense, impairment charges, restructuring
charges, transaction costs, and the allocation of support center
overhead.

(4)

See Forward-Looking Statements beginning on page 14.

2017 and 2018 Outlook(1)(Continued):

Stephen D. Farber, Executive Vice President and Chief Financial Officer
of Kindred, commented, “As a reminder, when the Company established its
2017 Outlook, it included a midpoint expectation for 2017 Core EBITDAR
of $930 million, with a range of $910 million to $950 million. As
discussed above, the Company is now reflecting its skilled nursing
facility business in discontinued operations. For consistency, this
change would require that the Company’s previous 2017 Core EBITDAR
Outlook be adjusted by approximately $140 million(2).”

Mr. Farber noted, “There are additional factors that should be
considered with updating expectations for our 2017 performance. For
example, we expect roughly $30 million of benefit, on a full-year basis,
from various cost reduction efforts and anticipated new RehabCare
contracts signed in connection with the sale of the skilled nursing
facility business. We expect the full amount of these items to benefit
2018, but the impact on 2017 is completely dependent on the timing of
multiple transaction closings, which are uncertain but expected to occur
in phases over the remainder of 2017. Also as discussed above, we are
closing five additional LTAC hospitals, including the conversion of an
LTAC hospital to an IRF, each of which has uncertain timing, lease
termination, wind-down and other costs. These and other items will have
both positive and negative impacts on Kindred’s reported results for the
balance of 2017.”

Mr. Farber continued, “For the second half of 2017, we expect our third
quarter to follow normal seasonal trends, making it the softest quarter
of the year. Due to ongoing and widely reported inpatient volume trends,
as well as continued labor pressure in our Hospital Division, the
Company is expecting to finish the year towards the lower end of its
previous outlook range.”

Mr. Farber concluded, “Given the complexity and uncertain timing of
these items over the next several months, it is not practical to update
our 2017 Outlook and we are limiting our commentary for the balance of
2017 to the items discussed above. As such, we are focusing on updating
and expanding our outlook for 2018. The items identified above should be
largely complete and incorporated on a run-rate basis in Kindred’s
results by the end of 2017, and estimates for these items are reflected
in the Company’s 2018 Outlook below.”

For the 2018 Outlook, Kindred anticipates:

Annual revenues at the midpoint of approximately $6.2 billion;

Core EBITDAR at the midpoint of approximately $830 million; and

Core diluted EPS from continuing operations at the midpoint of
approximately $0.80.

In determining these items, Kindred utilized the following 2018
estimates:

Total rent expense of approximately $300 million;

Depreciation and amortization expense of approximately $100 million;

Interest expense of approximately $245 million, including $17 million
of amortization of deferred financing fees;

Noncontrolling interest expense of approximately $45 million to $50
million;

An effective book tax rate of approximately 34%;

Weighted average shares outstanding of approximately 90.0 million; and

Routine capital expenditures of approximately $60 million.

Please note:

Annual revenues have been adjusted from approximately $6.3 billion in
the previous 2018 Outlook to $6.2 billion in the current 2018 Outlook
primarily to reflect the impact of recent and anticipated LTAC
hospital closures and consolidations;

Core EBITDAR has been adjusted from $840 million in the previous 2018
Outlook to $830 million in the current 2018 Outlook to reflect recent
and anticipated LTAC hospital closures and consolidations. Since these
hospitals have similar levels of Core EBITDAR and lease expense, the
simultaneous elimination of Core EBITDAR and lease expense are
expected to have an immaterial impact on Core earnings before income
taxes, depreciation and amortization, and Core diluted EPS from
continuing operations; and

__________

(1)

See Forward-Looking Statements beginning on page 14.

(2)

Reflects the impact of Core EBITDAR of the skilled nursing facility
business reclassified to discontinued operations, its direct
overhead, as well as the profits from applicable RehabCare contracts
servicing the skilled nursing facilities being sold.

2017 and 2018 Outlook(1)(Continued):

Core EBITDAR includes an estimated $30 million contribution, as noted
above, from forecasted cost savings and new RehabCare contract
signings anticipated in connection with the sale of the Company’s
skilled nursing facility business.

Cash Flow(1)

Mr. Farber commented, “Cash flow is a primary focus for Kindred. We are
very pleased with our strong second quarter cash flow performance that
was in line with our expectations, and enabled us to reduce funded debt
by $48 million during the quarter. We finished the quarter with
excellent liquidity, with $157 million drawn on our $900 million
revolving credit facility. After the sale of the skilled nursing
facility business, we anticipate Kindred will have approximately $800
million of NOLs. As we have previously discussed, these NOLs should
offset approximately 90% of book tax estimates for many years, and
significantly augment cash generation. Combining Core free cash flows
plus tax-related cash flows from utilizing Kindred’s NOLs, we expect
cash results for 2018 on this basis at a midpoint expectation of $180
million.”

Conference Call

As previously announced, investors and the general public may access a
live webcast of the second quarter 2017 conference call through a link
on the Company’s website at http://investors.kindredhealthcare.com.
The conference call will be held on August 4 at 9:00 a.m. (Eastern Time).

A telephone replay of the conference call will become available at
approximately 12:00 p.m. on August 4 by dialing (719) 457-0820, access
code: 4930738. The phone replay will be available through August 14 and
the online replay will be available through September 4.

Forward-Looking Statements and Non-GAAP Reconciliations

See page 14 for important disclosures regarding the Company’s
forward-looking statements and the non-GAAP financial reconciliations
that follow.

About Kindred Healthcare

Kindred Healthcare, Inc., a top-100 private employer in the United
States, is a FORTUNE 500 healthcare services company based in
Louisville, Kentucky with annual revenues of approximately $6.1 billion(2). At
June 30, 2017, Kindred’s continuing operations, through its
subsidiaries, had approximately 88,100 employees providing healthcare
services in 2,540 locations in 45 states, including 81 LTAC hospitals,
19 inpatient rehabilitation hospitals, 19 sub-acute units, 614 Kindred
at Home home health, hospice and non-medical home care sites of service,
102 inpatient rehabilitation units (hospital-based) and contract
rehabilitation service businesses which served 1,705 non-affiliated
sites of service. Ranked as one of Fortune magazine’s Most Admired
Healthcare Companies for eight years, Kindred’s mission is to promote
healing, provide hope, preserve dignity and produce value for each
patient, resident, family member, customer, employee and shareholder we
serve. For more information, go to www.kindredhealthcare.com.
You can also follow us on Twitter
and Facebook.

__________

(1)

See Forward-Looking Statements beginning on page 14.

(2)

Revenues from continuing operations for the last twelve months ended
June 30, 2017.

Adjustments to reconcile net income (loss) to net cash provided by
operating activities:

Depreciation expense

26,005

34,435

56,305

68,392

Amortization of intangible assets

4,360

5,957

9,020

12,783

Amortization of stock-based compensation costs

4,855

5,639

7,987

10,043

Amortization of deferred financing costs

4,352

3,708

8,484

7,275

Payment of capitalized lender fees related to debt amendment

-

(7,333

)

(5,403

)

(7,333

)

Provision for doubtful accounts

35,966

9,221

47,184

20,946

Deferred income taxes

(17,047

)

17,802

(15,820

)

29,298

Impairment charges

136,415

6,131

137,572

13,919

(Gain) loss on divestiture of discontinued operations

294,039

83

300,205

(179

)

Other

762

656

6,812

959

Change in operating assets and liabilities:

Accounts receivable

(13,390

)

(13,229

)

(99,223

)

(101,121

)

Inventories and other assets

1,939

(10,161

)

(2,518

)

(15,393

)

Accounts payable

2,187

23,077

(22,310

)

12,456

Income taxes

2,058

707

4,349

853

Due to third party payors

(6,304

)

351

(13,143

)

(4,492

)

Other accrued liabilities

9,845

20,850

(35,313

)

(106,369

)

Net cash provided by operating activities

92,669

135,208

31

4,868

Cash flows from investing activities:

Routine capital expenditures

(17,396

)

(28,724

)

(29,337

)

(46,830

)

Development capital expenditures

(5,857

)

(8,707

)

(11,296

)

(18,726

)

Acquisitions, net of cash acquired

(3,500

)

(1,372

)

(6,650

)

(27,711

)

Acquisition deposits

-

-

-

18,489

Sale of assets

-

142

-

1,223

Purchase of insurance subsidiary investments

(68,300

)

(20,154

)

(90,608

)

(52,995

)

Sale of insurance subsidiary investments

49,077

15,713

67,776

46,603

Net change in insurance subsidiary cash and cash equivalents

27,113

13,201

33,525

23,159

Net change in other investments

(273

)

583

(244

)

(33,398

)

Other

(108

)

792

46

(1,127

)

Net cash used in investing activities

(19,244

)

(28,526

)

(36,788

)

(91,313

)

Cash flows from financing activities:

Proceeds from borrowings under revolving credit

309,000

244,300

787,600

778,000

Repayment of borrowings under revolving credit

(349,900

)

(524,600

)

(693,300

)

(827,700

)

Proceeds from issuance of term loan, net of discount

-

198,100

-

198,100

Proceeds from other long-term debt

-

-

-

750

Repayment of term loan

(3,508

)

(3,508

)

(7,017

)

(6,511

)

Repayment of other long-term debt

(339

)

(270

)

(623

)

(550

)

Payment of deferred financing costs

(50

)

(141

)

(129

)

(292

)

Issuance of common stock in connection with employee benefit plans

32

-

32

-

Payment of dividend for mandatory redeemable preferred stock

(3,065

)

(2,853

)

(6,075

)

(5,654

)

Dividends paid

-

(10,225

)

(10,228

)

(20,293

)

Contributions made by noncontrolling interests

113

1,900

113

6,268

Distributions to noncontrolling interests

(12,500

)

(14,231

)

(38,301

)

(30,546

)

Purchase of noncontrolling interests

-

-

-

(1,000

)

Payroll tax payments for equity awards issuance

(74

)

(180

)

(2,329

)

(2,829

)

Net cash provided by (used in) financing activities

(60,291

)

(111,708

)

29,743

87,743

Change in cash and cash equivalents

13,134

(5,026

)

(7,014

)

1,298

Cash and cash equivalents at beginning of period

116,913

105,082

137,061

98,758

Cash and cash equivalents at end of period

$

130,047

$

100,056

$

130,047

$

100,056

KINDRED HEALTHCARE, INC.

Condensed Consolidated and Business Segment Data

(Unaudited)

(In thousands, except per share amounts)

Second quarter

2016 Quarters

2017 Quarters

% change v.

First

Second

Third

Fourth

First

Second

prior year

Condensed consolidated statement of operations data:

GAAP presentation:

Revenues

$

1,600,488

$

1,605,374

$

1,560,760

$

1,511,976

$

1,535,718

$

1,532,022

(4.6

)

Operating expenses

1,403,467

1,390,562

1,760,982

1,353,386

1,364,751

1,498,396

7.8

Building rent

65,985

67,025

66,946

64,350

64,656

64,861

(3.2

)

Equipment rent

10,158

11,211

9,911

8,649

8,887

8,861

(21.0

)

Depreciation and amortization

33,554

33,198

32,995

32,072

29,820

25,651

(22.7

)

Interest, net

57,253

57,567

58,059

58,625

58,819

58,573

1.7

Income (loss) from continuing operations before income taxes

30,071

45,811

(368,133

)

(5,106

)

8,785

(124,320

)

n/m

Provision (benefit) for income taxes

10,410

17,851

285,003

998

2,234

(16,116

)

n/m

Income (loss) from continuing operations

19,661

27,960

(653,136

)

(6,104

)

6,551

(108,204

)

n/m

Noncontrolling interests

(7,851

)

(8,847

)

(9,574

)

(8,575

)

(10,483

)

(10,791

)

n/m

Net income (loss) attributable to Kindred

$

11,810

$

19,113

$

(662,710

)

$

(14,679

)

$

(3,932

)

$

(118,995

)

n/m

Diluted EPS

$

0.13

$

0.21

$

(7.63

)

$

(0.17

)

$

(0.05

)

$

(1.36

)

n/m

Diluted shares

87,249

87,500

86,869

86,904

87,085

87,506

-

Core presentation (a):

EBITDAR

$

209,114

$

228,173

$

183,055

$

178,040

$

181,447

$

198,006

(13.2

)

Building rent

65,985

67,025

66,674

64,350

64,656

64,861

(3.2

)

Equipment rent

10,158

11,211

9,911

8,649

8,887

8,861

(21.0

)

Provision for income taxes

14,632

19,761

2,963

1,006

7,923

11,834

(40.1

)

Noncontrolling interests

(7,851

)

(9,863

)

(9,862

)

(8,575

)

(10,483

)

(11,111

)

12.7

Net income attributable to Kindred

19,681

29,548

2,591

4,763

859

17,115

(42.1

)

Core diluted EPS

$

0.22

$

0.33

$

0.03

$

0.05

$

0.01

$

0.19

(42.4

)

Diluted shares

87,249

87,500

87,529

87,641

87,744

88,165

0.8

Revenues by segment:

Kindred at Home:

Home health

$

430,035

$

438,556

$

449,958

$

444,073

$

450,831

$

459,176

4.7

Hospice

176,426

185,641

188,575

186,161

179,378

185,281

(0.2

)

606,461

624,197

638,533

630,234

630,209

644,457

3.2

Hospital division

654,098

645,406

588,943

545,864

556,646

540,809

(16.2

)

Kindred Rehabilitation Services:

Kindred Hospital Rehabilitation Services

167,045

171,095

170,308

171,352

178,115

178,439

4.3

RehabCare

198,297

190,169

187,456

186,943

194,354

190,906

0.4

365,342

361,264

357,764

358,295

372,469

369,345

2.2

1,625,901

1,630,867

1,585,240

1,534,393

1,559,324

1,554,611

(4.7

)

Eliminations

(25,413

)

(25,493

)

(24,480

)

(22,417

)

(23,606

)

(22,589

)

(11.4

)

$

1,600,488

$

1,605,374

$

1,560,760

$

1,511,976

$

1,535,718

$

1,532,022

(4.6

)

__________

(a)

See reconciliation of GAAP results to non-GAAP results beginning on
page 14. During the first quarter of 2017, the Company revised its
definitions of “core” non-GAAP measures. See “Non-GAAP Measures”
beginning on page 14 for a discussion regarding the revised
definitions. For comparability, core results for 2016 have been
revised to conform to the current year presentation.

n/m = not meaningful.

KINDRED HEALTHCARE, INC.

Condensed Consolidated and Business Segment Data (Continued)

(Unaudited)

(In thousands, except statistics)

Second quarter

2016 Quarters

2017 Quarters

% change v.

First

Second

Third

Fourth

First

Second

prior year

Segment adjusted operating income (loss):

Kindred at Home:

Home health

$

66,941

$

76,030

$

75,073

$

61,487

$

63,750

$

76,592

0.7

Hospice

24,866

31,329

31,326

28,805

27,581

32,784

4.6

91,807

107,359

106,399

90,292

91,331

109,376

1.9

Hospital division

136,416

127,510

83,940

93,778

93,438

91,580

(28.2

)

Kindred Rehabilitation Services:

Kindred Hospital Rehabilitation Services

48,119

50,729

49,759

49,728

51,760

53,422

5.3

RehabCare

6,036

7,363

4,224

1,032

4,932

(17,301

)

(335.0

)

54,155

58,092

53,983

50,760

56,692

36,121

(37.8

)

Core EBITDAR by segment (a):

Kindred at Home:

Home health

$

65,803

$

75,859

$

75,073

$

61,185

$

63,750

$

75,797

(0.1

)

Hospice

24,866

31,329

31,326

27,668

27,581

32,784

4.6

90,669

107,188

106,399

88,853

91,331

108,581

1.3

Hospital division

136,416

127,510

83,940

93,148

93,438

90,572

(29.0

)

Kindred Rehabilitation Services:

Kindred Hospital Rehabilitation Services

48,119

50,729

49,759

49,728

51,760

53,422

5.3

RehabCare

6,036

7,363

4,224

1,032

4,932

8,003

8.7

54,155

58,092

53,983

50,760

56,692

61,425

5.7

Support center expenses

(71,159

)

(64,265

)

(59,535

)

(54,334

)

(60,014

)

(62,572

)

(2.6

)

Litigation contingency expense

(885

)

(180

)

-

-

-

-

Transaction costs

(82

)

(172

)

(1,732

)

(387

)

-

-

$

209,114

$

228,173

$

183,055

$

178,040

$

181,447

$

198,006

(13.2

)

Segment adjusted operating income (loss) margin:

Kindred at Home:

Home health

15.6

17.3

16.7

13.8

14.1

16.7

(0.6

)

Hospice

14.1

16.9

16.6

15.5

15.4

17.7

0.8

Kindred at Home

15.1

17.2

16.7

14.3

14.5

17.0

(0.2

)

Hospital division

20.9

19.8

14.3

17.2

16.8

16.9

(2.9

)

Kindred Rehabilitation Services:

Kindred Hospital Rehabilitation Services

28.8

29.6

29.2

29.0

29.1

29.9

0.3

RehabCare

3.0

3.9

2.3

0.6

2.5

(9.1

)

(13.0

)

Kindred Rehabilitation Services

14.8

16.1

15.1

14.2

15.2

9.8

(6.3

)

Core EBITDAR margin by segment (a):

Kindred at Home:

Home health

15.3

17.3

16.7

13.8

14.1

16.5

(0.8

)

Hospice

14.1

16.9

16.6

14.9

15.4

17.7

0.8

Kindred at Home

15.0

17.2

16.7

14.1

14.5

16.8

(0.4

)

Hospital division

20.9

19.8

14.3

17.1

16.8

16.7

(3.1

)

Kindred Rehabilitation Services:

Kindred Hospital Rehabilitation Services

28.8

29.6

29.2

29.0

29.1

29.9

0.3

RehabCare

3.0

3.9

2.3

0.6

2.5

4.2

0.3

Kindred Rehabilitation Services

14.8

16.1

15.1

14.2

15.2

16.6

0.5

Consolidated

13.1

14.2

11.7

11.8

11.8

12.9

(1.3

)

__________

(a)

See reconciliation of GAAP results to non-GAAP results beginning on
page 14. During the first quarter of 2017, the Company revised its
definitions of “core” non-GAAP measures. See “Non-GAAP Measures”
beginning on page 14 for a discussion regarding the revised
definitions. For comparability, core results for 2016 have been
revised to conform to the current year presentation.

KINDRED HEALTHCARE, INC.

Condensed Business Segment Data

(Unaudited)

Second quarter

2016 Quarters

2017 Quarters

% change v.

First

Second

Third

Fourth

First

Second

prior year

Kindred at Home:

Home Health:

Sites of service (at end of period)

384

384

395

390

379

377

Revenue mix %:

Medicare

79.8

79.3

78.1

77.9

76.7

75.7

Medicaid

2.1

2.1

2.5

1.9

1.7

1.7

Commercial and other

8.4

8.2

8.6

10.6

11.5

11.4

Commercial paid at episodic rates

9.7

10.4

10.8

9.6

10.1

11.2

Episodic revenues ($ 000s)

$

325,821

$

332,193

$

332,562

$

323,398

$

326,881

$

334,420

0.7

Total admissions

88,696

87,084

86,761

87,148

94,510

89,018

2.2

Same-store total admissions

87,394

85,922

85,382

86,056

93,922

88,300

2.8

Total episodic admissions

71,426

70,212

69,219

67,501

73,270

69,657

(0.8

)

Same-store total episodic admissions

70,416

69,317

68,211

66,784

72,911

69,207

(0.2

)

Medicare episodic admissions

62,011

60,730

59,823

59,540

62,404

58,575

(3.5

)

Total episodes

113,887

113,278

113,256

111,164

114,964

113,579

0.3

Episodes per admission

1.59

1.61

1.64

1.65

1.57

1.63

1.2

Revenue per episode

$

2,861

$

2,933

$

2,936

$

2,909

$

2,843

$

2,944

0.4

Hospice:

Sites of service (at end of period)

177

177

185

183

180

177

Admissions

13,234

13,149

12,916

12,660

13,649

12,561

(4.5

)

Same-store admissions

12,761

12,743

12,541

12,362

13,332

12,363

(3.0

)

Average length of stay

92

91

98

100

96

94

3.3

Patient days

1,183,908

1,238,584

1,277,125

1,246,152

1,193,061

1,215,619

(1.9

)

Average daily census

13,010

13,611

13,882

13,545

13,256

13,358

(1.9

)

Revenue per patient day

$

149

$

150

$

148

$

149

$

150

$

152

1.3

Community Care and other revenues (included in Home Health
business segment) ($ 000s)

$

66,305

$

68,229

$

75,978

$

74,875

$

74,095

$

74,222

8.8

Kindred Rehabilitation Services:

Kindred Hospital Rehabilitation Services:

Freestanding IRFs:

End of period data:

Number of IRFs

19

19

19

19

19

19

Number of licensed beds

969

969

969

995

995

995

Discharges (a)

4,448

4,646

4,644

4,671

4,775

4,766

2.6

Same-hospital discharges (a)

4,295

4,535

4,546

4,538

4,393

4,517

(0.4

)

Occupancy % (a)

70.6

70.6

68.8

66.5

71.4

70.0

(0.8

)

Average length of stay (a)

13.2

12.9

12.7

12.6

12.8

12.8

(0.8

)

Revenue per discharge (a)

$

19,731

$

19,318

$

19,599

$

19,486

$

20,097

$

20,620

6.7

Contract services:

Sites of service (at end of period):

Inpatient rehabilitation units

104

105

104

102

101

102

LTAC hospitals

119

121

120

119

119

116

Sub-acute units

7

7

7

5

7

6

Outpatient units

139

138

139

132

129

121

369

371

370

358

356

345

Revenue per site

$

211,417

$

215,798

$

210,810

$

220,733

$

227,100

$

228,534

5.9

RehabCare:

Sites of service (at end of period)

1,767

1,759

1,754

1,718

1,703

1,734

Revenue per site

$

112,222

$

108,113

$

106,873

$

108,814

$

114,125

$

110,095

1.8

__________

(a) Excludes non-consolidating IRF.

KINDRED HEALTHCARE, INC.

Condensed Business Segment Data (Continued)

(Unaudited)

Second quarter

2016 Quarters

2017 Quarters

% change v.

First

Second

Third

Fourth

First

Second

prior year

Hospitals (excluding sub-acute units and skilled nursing
facility):

End of period data:

Number of transitional care hospitals

95

97

94

82

82

81

Number of licensed beds

7,089

7,067

6,890

6,107

6,107

6,041

Revenues (000s)

$

643,299

$

633,695

$

575,323

$

530,746

$

540,280

$

525,458

(17.1

)

Revenue mix %:

Medicare

57.8

55.5

54.6

53.5

52.8

50.3

Medicaid

4.2

4.2

4.0

4.5

3.9

5.0

Medicare Advantage

11.5

12.0

12.1

11.0

12.2

12.3

Medicaid Managed

5.6

6.3

7.3

8.0

9.1

9.1

Commercial insurance and other

20.9

22.0

22.0

23.0

22.0

23.3

Patient criteria data:

Revenues:

Compliant patients

88.5

%

86.0

%

88.3

%

Site neutral

11.5

%

14.0

%

11.7

%

Revenues per patient day:

Compliant patients

$

1,853

$

1,816

$

1,806

Site neutral

926

1,041

1,053

Total

1,662

1,645

1,667

Admissions:

Medicare

8,919

8,253

7,861

7,351

7,529

6,743

(18.3

)

Medicaid

463

386

375

336

354

381

(1.3

)

Medicare Advantage

1,453

1,382

1,327

1,210

1,354

1,239

(10.3

)

Medicaid Managed

733

768

861

787

851

903

17.6

Commercial insurance and other

1,871

1,807

1,727

1,488

1,614

1,608

(11.0

)

13,439

12,596

12,151

11,172

11,702

10,874

(13.7

)

Patient days:

Medicare

229,004

219,013

202,482

186,290

187,738

173,916

(20.6

)

Medicaid

21,134

19,409

16,781

12,181

13,334

13,333

(31.3

)

Medicare Advantage

45,760

47,697

43,241

37,526

41,020

40,555

(15.0

)

Medicaid Managed

25,341

27,267

28,534

29,275

32,713

32,635

19.7

Commercial insurance and other

62,769

63,009

59,856

54,148

53,695

54,809

(13.0

)

384,008

376,395

350,894

319,420

328,500

315,248

(16.2

)

Average length of stay:

Medicare

25.7

26.5

25.8

25.3

24.9

25.8

(2.8

)

Medicaid

45.6

50.3

44.7

36.3

37.7

35.0

(30.4

)

Medicare Advantage

31.5

34.5

32.6

31.0

30.3

32.7

(5.2

)

Medicaid Managed

34.6

35.5

33.1

37.2

38.4

36.1

1.8

Commercial insurance and other

33.5

34.9

34.7

36.4

33.3

34.1

(2.2

)

Weighted average

28.6

29.9

28.9

28.6

28.1

29.0

(3.0

)

Revenues per admission:

Medicare

$

41,717

$

42,579

$

39,945

$

38,602

$

37,867

$

39,219

(7.9

)

Medicaid

57,928

69,797

61,338

70,333

60,091

69,304

(0.7

)

Medicare Advantage

51,080

55,105

52,363

48,387

48,555

51,958

(5.7

)

Medicaid Managed

49,287

51,696

48,631

54,238

57,736

53,159

2.8

Commercial insurance and other

71,651

77,193

73,515

82,066

73,750

76,007

(1.5

)

Weighted average

47,868

50,309

47,348

47,507

46,170

48,322

(3.9

)

Revenues per patient day:

Medicare

$

1,625

$

1,605

$

1,551

$

1,523

$

1,519

$

1,521

(5.2

)

Medicaid

1,269

1,388

1,371

1,940

1,595

1,980

42.7

Medicare Advantage

1,622

1,597

1,607

1,560

1,603

1,587

(0.6

)

Medicaid Managed

1,426

1,456

1,467

1,458

1,502

1,471

1.0

Commercial insurance and other

2,136

2,214

2,121

2,255

2,217

2,230

0.7

Weighted average

1,675

1,684

1,640

1,662

1,645

1,667

(1.0

)

Medicare case mix index (discharged patients only)

1.163

1.179

1.172

1.153

1.172

1.171

(0.7

)

Average daily census

4,220

4,136

3,814

3,472

3,650

3,464

(16.2

)

Occupancy %

68.0

67.5

61.6

64.1

67.6

64.3

(4.7

)

KINDRED HEALTHCARE, INC.

Condensed Business Segment Data (Continued)

(Unaudited)

Second quarter

2016 Quarters

2017 Quarters

% change v.

First

Second

Third

Fourth

First

Second

prior year

Same-hospital data (a):

End of period data:

Number of transitional care hospitals

77

77

77

77

77

77

Number of licensed beds

5,894

5,894

5,894

5,894

5,894

5,894

Revenues (000s)

$

557,237

$

552,040

$

503,652

$

516,917

$

523,704

$

510,763

(7.5

)

Revenue mix %:

Medicare

58.1

55.3

54.0

53.0

52.3

50.4

Medicaid

3.8

3.9

3.7

4.6

4.1

5.1

Medicare Advantage

11.2

11.7

12.2

11.0

12.1

12.0

Medicaid Managed

5.8

6.7

7.9

8.2

9.4

9.3

Commercial insurance and other

21.1

22.4

22.2

23.2

22.1

23.2

Patient criteria data:

Revenues:

Compliant patients

88.7

%

85.9

%

88.4

%

Site neutral

11.3

%

14.1

%

11.6

%

Revenues per patient day:

Compliant patients

$

1,860

$

1,821

$

1,809

Site neutral

924

1,049

1,058

Total

1,670

1,650

1,670

Admissions:

Medicare

7,722

7,100

6,787

7,046

7,225

6,568

(7.5

)

Medicaid

395

342

343

336

354

381

11.4

Medicare Advantage

1,203

1,128

1,151

1,166

1,307

1,184

5.0

Medicaid Managed

632

702

791

787

849

891

26.9

Commercial insurance and other

1,543

1,512

1,442

1,434

1,543

1,542

2.0

11,495

10,784

10,514

10,769

11,278

10,566

(2.0

)

Patient days:

Medicare

198,076

188,342

174,752

178,964

179,933

168,583

(10.5

)

Medicaid

14,670

13,547

12,085

12,175

13,587

13,307

(1.8

)

Medicare Advantage

37,960

40,229

38,033

36,496

39,536

38,690

(3.8

)

Medicaid Managed

22,421

24,893

26,687

29,284

32,701

32,363

30.0

Commercial insurance and other

52,803

53,313

51,153

52,688

51,732

52,818

(0.9

)

325,930

320,324

302,710

309,607

317,489

305,761

(4.5

)

Average length of stay:

Medicare

25.7

26.5

25.7

25.4

24.9

25.7

(3.2

)

Medicaid

37.1

39.6

35.2

36.2

38.4

34.9

(11.8

)

Medicare Advantage

31.6

35.7

33.0

31.3

30.2

32.7

(8.4

)

Medicaid Managed

35.5

35.5

33.7

37.2

38.5

36.3

2.4

Commercial insurance and other

34.2

35.3

35.5

36.7

33.5

34.3

(2.9

)

Weighted average

28.4

29.7

28.8

28.8

28.2

28.9

(2.6

)

Revenues per admission:

Medicare

$

41,951

$

42,976

$

40,050

$

38,855

$

37,886

$

39,155

(8.9

)

Medicaid

53,157

62,759

54,745

70,243

61,194

68,882

9.8

Medicare Advantage

51,858

57,332

53,664

48,813

48,567

51,814

(9.6

)

Medicaid Managed

51,511

52,424

50,079

54,280

57,873

53,413

1.9

Commercial insurance and other

76,054

81,993

77,444

83,620

74,989

76,792

(6.3

)

Weighted average

48,476

51,191

47,903

48,000

46,436

48,340

(5.6

)

Revenues per patient day:

Medicare

$

1,635

$

1,620

$

1,555

$

1,530

$

1,521

$

1,525

(5.9

)

Medicaid

1,431

1,584

1,554

1,939

1,594

1,972

24.5

Medicare Advantage

1,643

1,608

1,624

1,560

1,606

1,586

(1.4

)

Medicaid Managed

1,452

1,478

1,484

1,459

1,503

1,471

(0.5

)

Commercial insurance and other

2,222

2,325

2,183

2,276

2,237

2,242

(3.6

)

Weighted average

1,710

1,723

1,664

1,670

1,650

1,670

(3.1

)

Average daily census

3,582

3,520

3,290

3,365

3,528

3,360

(4.5

)

__________

(a)

All historical statistics have been adjusted to present the ongoing
hospital division portfolio excluding four hospitals acquired during
the second quarter of 2016. See reconciliation of same-hospital
revenues to reported hospital revenues on page 17.

Forward-Looking Statements

This earnings release includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements include, but are not limited to, all
statements regarding the Company’s ability to exit the skilled nursing
facility business and the expected timing of such exit, including the
receipt of all required regulatory approvals and the satisfaction of the
closing conditions for the transaction, as well as the Company’s ability
to realize the anticipated benefits, sale proceeds, cost savings and
strategic gains from this transaction, all statements regarding the
Company’s expected future financial position, results of operations,
cash flows, dividends, financing plans, business strategy, budgets,
capital expenditures, competitive positions, growth opportunities, plans
and objectives of management, government investigations, regulatory
matters, and statements containing words such as “anticipate,”
“approximate,” “believe,” “plan,” “estimate,” “expect,” “project,”
“could,” “would,” “should,” “will,” “intend,” “hope,” “may,”
“potential,” “upside,” and other similar expressions. Statements in this
earnings release concerning the Company’s business outlook or future
economic performance, anticipated profitability, revenues, expenses,
dividends or other financial items, and product or services line growth,
and expected outcome of government investigations and other regulatory
matters, together with other statements that are not historical facts,
are forward-looking statements that are estimates reflecting the best
judgment of the Company based upon currently available information.

Such forward-looking statements are inherently uncertain, and
stockholders and other potential investors must recognize that actual
results may differ materially from the Company’s expectations as a
result of a variety of factors. Such forward-looking statements are
based upon management’s current expectations and include known and
unknown risks, uncertainties and other factors, many of which the
Company is unable to predict or control, that may cause the Company’s
actual results, performance, or plans to differ materially from any
future results, performance or plans expressed or implied by such
forward-looking statements. These statements involve risks,
uncertainties, and other factors detailed from time to time in the
Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K filed with the Securities and Exchange
Commission (the “SEC”).

Many of these factors are beyond the Company’s control. The Company
cautions investors that any forward-looking statements made by the
Company are not guarantees of future performance. The Company disclaims
any obligation to update any such factors or to announce publicly the
results of any revisions to any of the forward-looking statements to
reflect future events or developments.

Non-GAAP Measures

In addition to the results provided in accordance with GAAP, the Company
has provided information in this earnings release using certain non-GAAP
measures. The use of these non-GAAP measures is not intended to replace
the presentation of the Company’s financial results in accordance with
GAAP. Reconciliations of these non-GAAP measures to the most directly
comparable GAAP measures are included in the following pages of this
earnings release.

During the first quarter of 2017, the Company revised its definitions of
“core” non-GAAP measures. As revised, the Company’s core non-GAAP
measures, including core net income attributable to Kindred, core
EBITDAR, core diluted EPS, core operating cash flows and core free cash
flows, no longer exclude (1) transaction, integration, research and
development, and litigation contingency expenses that are not
individually material, (2) non-restructuring related facility closing
charges, and (3) non-executive or non-restructuring related severance,
retirement and retention costs. For comparability, “core” results for
2016 have been revised to conform to the current year presentation.

EBITDAR: The Company defines EBITDAR as earnings before interest,
income taxes, depreciation, amortization and total rent, and believes
that the presentation of EBITDAR is useful to investors because
creditors, securities analysts and investors use EBITDAR to compare the
performance of companies in the healthcare industry before consideration
of the capital structure of fixed assets and financing costs, which can
vary significantly among companies.

For each of the Company’s segments, Segment adjusted operating income
(loss) is a measure of performance used by the Company’s chief operating
decision makers in accordance with “Accounting Standard Codification 280
− Segment Reporting.” In this context, the Company defines Segment
adjusted operating income (loss) as EBITDAR, excluding litigation
contingency expense, impairment charges, restructuring charges,
transaction costs, and the allocation of support center overhead.

Non-GAAP Measures (Continued)

Core Operating Results: The Company calculates core operating
results, including core net income attributable to Kindred, core EBITDAR
and core diluted EPS, by excluding charges related to impairments,
business interruption settlements, restructuring charges, debt amendment
costs, executive or restructuring-related severance, retirement and
retention costs, restructuring-related facility closing charges, and
material transaction, integration, litigation, and research and
development costs. The Company believes that the presentation of core
operating results provides additional information to investors to
facilitate the comparison between periods by excluding certain charges
that are not representative of its ongoing operations due to the
materiality and nature of the charges. The Company’s management uses
core net income attributable to Kindred, core EBITDAR and core diluted
EPS as measures of operational performance that are meaningful to
investors, and for the measurement of internal incentive compensation
goals, in addition to other measures. The Company uses these measures to
assess the relative performance and attainment of internal incentive
compensation goals of its operating divisions, as well as the employees
that operate these businesses. In addition, the Company believes these
measures are important, because securities analysts and investors use
these measures to compare the Company’s performance to other companies
in the healthcare industry.

Same-Hospital Revenues: The same-hospital revenues are calculated
by excluding from the Company’s Hospital Division revenues the results
from one hospital that closed during the second quarter of 2017, four
hospitals acquired in 2016, 15 hospitals sold in 2016, and three
hospitals that closed during 2016. The Company believes the presentation
of same-hospital revenues provides investors, equity analysts and others
with useful information regarding the performance of the Company’s
hospital operations that are comparable for the periods presented.

For EBITDAR, core net income attributable to Kindred, and core EBITDAR,
the Company believes that income (loss) from continuing operations is
the most comparable GAAP measure. For core diluted EPS, the Company
believes that GAAP diluted earnings (loss) per share from continuing
operations is the most comparable GAAP measure. Readers of the Company’s
financial information should consider income (loss) from continuing
operations and diluted earnings (loss) per share from continuing
operations as important measures of the Company’s financial performance,
because they provide the most complete measures of its performance. For
same-hospital revenues, the Company believes that reported hospital
segment revenues is the most comparable GAAP measure. Readers of the
Company’s financial information should consider reported hospital
segment revenues as an important measure of the Company’s Hospital
Division financial performance because it provides the most complete
measure of its performance. Operating results presented on a core basis,
as well as a same-hospital basis, should be considered in addition to,
not as a substitute for, or superior to, financial measures based upon
GAAP as an indicator of operating performance.

Also in this earnings release, the Company provides the financial
measures of operating cash flows and free cash flows excluding certain
items, which the Company refers to as core operating cash flows and core
free cash flows, respectively.

Core Operating Cash Flows: The Company defines core operating
cash flows as operating cash flows excluding payments related to
business interruption settlements, restructuring charges, debt amendment
costs, executive or restructuring-related severance, retirement and
retention costs, restructuring-related facility closing charges, and
material transaction, integration, litigation, and research and
development costs, net of income tax benefits. The Company believes that
core operating cash flows provide important information to investors for
comparability to other companies that use similar measures. Management
uses core operating cash flows to evaluate consolidated operating
performance and in making decisions related to acquisitions, development
capital expenditures, dividends, long-term debt repayments and other
uses.

Core Free Cash Flows: The Company defines core free cash flows as
operating cash flows excluding payments related to business interruption
settlements, restructuring charges, debt amendment costs, executive or
restructuring-related severance, retirement and retention costs,
restructuring-related facility closing charges, and material
transaction, integration, litigation, and research and development
costs, net of income tax benefits but including routine capital
expenditures and distributions to noncontrolling interests. The Company
believes that core free cash flows provide important information to
investors for comparability to other companies that use similar
measures. Management uses core free cash flows in making decisions
related to acquisitions, development capital expenditures, dividends,
long-term debt repayments and other uses.

The Company recognizes that core operating cash flows and core free cash
flows are non-GAAP measures and are not intended to replace the
presentation of the Company’s cash flows in accordance with GAAP. For
core operating cash flows and core free cash flows, the Company believes
net cash flows provided by operating activities is the most comparable
GAAP measure. Readers of the Company’s financial information should
consider net cash flows provided by operating activities as an important
measure because it provides the most complete measure of cash provided
by operating activities. Core operating cash flows and core free cash
flows should be considered in addition to, not as a substitute for, or
superior to, financial measures based upon GAAP as an indicator of the
Company’s cash flows provided by operating activities.

KINDRED HEALTHCARE, INC.

Reconciliation of GAAP Results to Non-GAAP Measures

(Unaudited)

(In thousands, except per share amounts and statistics)

In addition to the results provided in accordance with GAAP, the
Company has provided information in this earnings release to compute
certain non-GAAP measures for the three months ended June 30, 2017
and 2016, and for the six months ended June 30, 2017 and 2016,
before certain charges or on a core basis. The charges that were
excluded from core operating results are denoted in the tables below.

The income tax benefit associated with the excluded charges,
including the deferred tax valuation allowance for the three
months and six months ended June 30, 2017, was calculated using an
effective income tax rate of 17.0% and 14.3% for the three months
ended June 30, 2017 and 2016, respectively, and 19.2% and 24.1%
for the six months ended June 30, 2017 and 2016, respectively. The
difference in the effective income tax rate compared to the same
prior year period is primarily attributable to the deferred tax
valuation allowance and, for 2016, the composition of charges that
are non-deductible for income tax purposes, including the
impairment charges and litigation contingency expense.

Three months ended

Six months ended

June 30,

June 30,

2017

2016

2017

2016

Reconciliation of income from continuing operations before charges:

As reported:

Income (loss) from continuing operations attributable to Kindred

($118,995

)

$

19,113

($122,927

)

$

30,923

Diluted income (loss) per common share from continuing operations

($1.36

)

$

0.21

($1.41

)

$

0.35

Weighted average diluted shares outstanding

87,506

87,500

87,297

87,374

Detail of charges:

Restructuring charges:

Facility/branch divestitures and closings

($2,842

)

$

759

($8,202

)

$

418

Retention and severance costs

(274

)

(446

)

(3,015

)

(1,370

)

Transaction costs

-

(649

)

-

(1,085

)

(3,116

)

(336

)

(11,217

)

(2,037

)

Lease termination costs (charged to rent restructuring charges)

(1,934

)

(462

)

(3,839

)

(713

)

Impairment charges

(135,829

)

(6,131

)

(136,303

)

(13,919

)

RehabCare Collection Litigation

(25,304

)

-

(25,304

)

-

Research and development

-

(3,076

)

-

(3,939

)

Litigation contingency expense

-

(750

)

-

(1,775

)

Business interruption settlements

1,803

171

1,803

1,309

Debt amendment fees not capitalized

-

(1,103

)

-

(1,103

)

Gentiva transaction costs:

Professional and consulting fees

-

(1,319

)

-

(2,367

)

Severance and retention

-

(355

)

-

(910

)

(164,380

)

(13,361

)

(174,860

)

(25,454

)

Income tax benefit

64,684

1,910

68,808

6,132

Deferred tax valuation allowance

(36,734

)

-

(35,169

)

-

Charges net of income taxes

(136,430

)

(11,451

)

(141,221

)

(19,322

)

Noncontrolling interests

320

1,016

320

1,016

(136,110

)

(10,435

)

(140,901

)

(18,306

)

Allocation to participating unvested restricted stockholders

-

248

-

353

Available to common stockholders

($136,110

)

($10,187

)

($140,901

)

($17,953

)

Diluted loss per common share related to charges

($1.56

)

($0.12

)

($1.61

)

($0.20

)

Weighted average diluted shares outstanding

87,506

87,500

87,297

87,374

Core:

Income from continuing operations attributable to Kindred before
charges

$

17,115

$

29,548

$

17,974

$

49,229

Diluted earnings per common share from continuing operations before
charges (a)

$

0.19

$

0.33

$

0.20

$

0.55

Weighted average diluted shares outstanding used to compute
earnings per common share from continuing operations before charges

88,165

87,500

87,956

87,374

Reconciliation of effective income tax rate before charges:

Effective income tax rate before charges

29.5

%

33.4

%

33.3

%

33.9

%

Impact of charges on effective income tax rate

-16.5

%

5.6

%

-21.3

%

3.3

%

Reported effective income tax rate

13.0

%

39.0

%

12.0

%

37.2

%

__________

(a)

For purposes of computing diluted earnings per common share before
charges, income from continuing operations before charges was
reduced by $0.5 million and $0.7 million for the three months ended
June 30, 2017 and 2016, respectively, and by $0.4 million and $1.0
million for the six months ended June 30, 2017 and 2016,
respectively, for the allocation of income to participating unvested
restricted stockholders.

KINDRED HEALTHCARE, INC.

Reconciliation of GAAP Results to Non-GAAP Measures (Continued)

(Unaudited)

(In thousands)

A reconciliation of revenues for home health for each historical
period follows:

Second quarter

2016 Quarters

2017 Quarters

% change v.

First

Second

Third

Fourth

First

Second

prior year

Home health

$

363,730

$

370,327

$

373,980

$

369,198

$

376,736

$

384,954

3.9

Community care and other

66,305

68,229

75,978

74,875

74,095

74,222

Reported home health revenues

$

430,035

$

438,556

$

449,958

$

444,073

$

450,831

$

459,176

4.7

A reconciliation of revenues for the Hospital Division for each
historical period follows:

Second quarter

2016 Quarters

2017 Quarters

% change v.

First

Second

Third

Fourth

First

Second

prior year

Transitional care hospitals

$

643,299

$

633,695

$

575,323

$

530,746

$

540,280

$

525,458

(17.1

)

Sub-acute units and one skilled nursing facility

10,799

11,711

13,620

15,118

16,366

15,351

Reported hospital division revenues

$

654,098

$

645,406

$

588,943

$

545,864

$

556,646

$

540,809

(16.2

)

A reconciliation of reported hospital revenues to same-hospital
revenues for each historical period follows:

Second quarter

2016 Quarters

2017 Quarters

% change v.

First

Second

Third

Fourth

First

Second

prior year

Transitional care hospitals

$

643,299

$

633,695

$

575,323

$

530,746

$

540,280

$

525,458

(17.1

)

Hospitals acquired during 2016 (a)

-

(2,836

)

(10,655

)

(9,958

)

(11,717

)

(12,470

)

Hospitals sold during 2016 (b)

(71,941

)

(64,084

)

(47,098

)

732

449

(623

)

Hospital closed during 2017 (c)

(5,850

)

(5,871

)

(5,010

)

(4,420

)

(5,276

)

(2,159

)

Hospitals closed during 2016 (d)

(8,271

)

(8,864

)

(8,908

)

(183

)

(32

)

557

Same-hospital revenues

$

557,237

$

552,040

$

503,652

$

516,917

$

523,704

$

510,763

(7.5

)

__________

(a) Four hospitals acquired during the second quarter of 2016.

(b) Three hospitals sold during the second quarter of 2016 and 12
hospitals sold during the fourth quarter of 2016.

(c) One hospital closed during the second quarter of 2017.

(d) Three hospitals closed during the third quarter of 2016.

KINDRED HEALTHCARE, INC.

Reconciliation of GAAP Results to Non-GAAP Measures (Continued)

(Unaudited)

(In thousands, except per share amounts)

Three months ended June 30, 2017

Charges

Deferred

Business

RehabCare

tax

Before

As

interruption

Collection

Impairment

Restructuring

valuation

charges

reported

settlements

Litigation

charges

charges

allowance

Total

(“core”) (a)

Income (loss) from continuing operations:

Segment adjusted operating income (loss):

Kindred at Home:

Home health

$

76,592

$

(795

)

$

-

$

-

$

-

$

-

$

(795

)

$

75,797

Hospice

32,784

-

-

-

-

-

-

32,784

109,376

(795

)

-

-

-

-

(795

)

108,581

Hospital division

91,580

(1,008

)

-

-

-

-

(1,008

)

90,572

Kindred Rehabilitation Services:

Kindred Hospital Rehabilitation Services

53,422

-

-

-

-

-

-

53,422

RehabCare

(17,301

)

-

25,304

-

-

-

25,304

8,003

36,121

-

25,304

-

-

-

25,304

61,425

Support center expenses

(62,572

)

-

-

-

-

-

-

(62,572

)

Impairment charges

(135,829

)

-

-

135,829

-

-

135,829

-

Restructuring charges

(3,116

)

-

-

-

3,116

-

3,116

-

Building rent

(64,861

)

-

-

-

-

-

-

(64,861

)

Equipment rent

(8,861

)

-

-

-

-

-

-

(8,861

)

Restructuring charges - rent

(1,934

)

-

-

-

1,934

-

1,934

-

Depreciation and amortization

(25,651

)

-

-

-

-

-

-

(25,651

)

Interest, net

(58,573

)

-

-

-

-

-

-

(58,573

)

Income (loss) from continuing operations before income taxes

(124,320

)

(1,803

)

25,304

135,829

5,050

-

164,380

40,060

Provision (benefit) for income taxes

(16,116

)

(709

)

9,957

53,449

1,987

(36,734

)

27,950

11,834

(108,204

)

(1,094

)

15,347

82,380

3,063

36,734

136,430

28,226

Noncontrolling interests

(10,791

)

-

(320

)

-

-

-

(320

)

(11,111

)

Income (loss) attributable to Kindred

$

(118,995

)

$

(1,094

)

$

15,027

$

82,380

$

3,063

$

36,734

$

136,110

$

17,115

Diluted earnings (loss) per common share

$

(1.36

)

$

0.19

Diluted shares used in computing earnings (loss) per common share

87,506

88,165

Three months ended June 30, 2016

Charges

Gentiva

Business

transaction

Before

As

interruption

Litigation

Impairment

Research and

Debt

Restructuring

and

charges

reported

settlements

contingency

charges

development

amendment

charges

integration

Total

(“core”) (a)

Income from continuing operations:

Segment adjusted operating income:

Kindred at Home:

Home health

$

76,030

$

(171

)

$

-

$

-

$

-

$

-

$

-

$

-

$

(171

)

$

75,859

Hospice

31,329

-

-

-

-

-

-

-

-

31,329

107,359

(171

)

-

-

-

-

-

-

(171

)

107,188

Hospital division

127,510

-

-

-

-

-

-

-

-

127,510

Kindred Rehabilitation Services:

Kindred Hospital Rehabilitation Services

50,729

-

-

-

-

-

-

-

-

50,729

RehabCare

7,363

-

-

-

-

-

-

-

-

7,363

58,092

-

-

-

-

-

-

-

-

58,092

Support center expenses

(68,444

)

-

-

-

3,076

1,103

-

-

4,179

(64,265

)

Litigation contingency expense

(930

)

-

750

-

-

-

-

-

750

(180

)

Impairment charges

(6,131

)

-

-

6,131

-

-

-

-

6,131

-

Restructuring charges

(336

)

-

-

-

-

-

336

-

336

-

Transaction costs

(1,846

)

-

-

-

-

-

-

1,674

1,674

(172

)

Building rent

(67,025

)

-

-

-

-

-

-

-

-

(67,025

)

Equipment rent

(11,211

)

-

-

-

-

-

-

-

-

(11,211

)

Restructuring charges - rent

(462

)

-

-

-

-

-

462

-

462

-

Depreciation and amortization

(33,198

)

-

-

-

-

-

-

-

-

(33,198

)

Interest, net

(57,567

)

-

-

-

-

-

-

-

-

(57,567

)

Income from continuing operations before income taxes

45,811

(171

)

750

6,131

3,076

1,103

798

1,674

13,361

59,172

Provision for income taxes

17,851

(129

)

(1,511

)

4,633

2,324

833

(5,505

)

1,265

1,910

19,761

27,960

(42

)

2,261

1,498

752

270

6,303

409

11,451

39,411

Noncontrolling interests

(8,847

)

-

-

(1,016

)

-

-

-

-

(1,016

)

(9,863

)

Income attributable to Kindred

$

19,113

$

(42

)

$

2,261

$

482

$

752

$

270

$

6,303

$

409

$

10,435

$

29,548

Diluted earnings per common share

$

0.21

$

0.33

Diluted shares used in computing earnings per common share

87,500

87,500

__________

(a)

During the first quarter of 2017, the Company revised its
definitions of “core” non-GAAP measures. See “Non-GAAP Measures”
beginning on page 14 for a discussion regarding the revised
definitions. For comparability, core results for 2016 have been
revised to conform to the current year presentation.

KINDRED HEALTHCARE, INC.

Reconciliation of GAAP Results to Non-GAAP Measures (Continued)

(Unaudited)

(In thousands, except per share amounts)

Six months ended June 30, 2017

Charges

Deferred

Business

RehabCare

tax

Before

As

interruption

Collection

Impairment

Restructuring

valuation

charges

reported

settlements

Litigation

charges

charges

allowance

Total

(“core”) (a)

Income (loss) from continuing operations:

Segment adjusted operating income (loss):

Kindred at Home:

Home health

$

140,342

$

(795

)

$

-

$

-

$

-

$

-

$

(795

)

$

139,547

Hospice

60,365

-

-

-

-

-

-

60,365

200,707

(795

)

-

-

-

-

(795

)

199,912

Hospital division

185,018

(1,008

)

-

-

-

-

(1,008

)

184,010

Kindred Rehabilitation Services:

Kindred Hospital Rehabilitation Services

105,182

-

-

-

-

-

-

105,182

RehabCare

(12,369

)

-

25,304

-

-

-

25,304

12,935

92,813

-

25,304

-

-

-

25,304

118,117

Support center expenses

(122,586

)

-

-

-

-

-

-

(122,586

)

Impairment charges

(136,303

)

-

-

136,303

-

-

136,303

-

Restructuring charges

(11,217

)

-

-

-

11,217

-

11,217

-

Building rent

(129,517

)

-

-

-

-

-

-

(129,517

)

Equipment rent

(17,748

)

-

-

-

-

-

-

(17,748

)

Restructuring charges - rent

(3,839

)

-

-

-

3,839

-

3,839

-

Depreciation and amortization

(55,471

)

-

-

-

-

-

-

(55,471

)

Interest, net

(117,392

)

-

-

-

-

-

-

(117,392

)

Income (loss) from continuing operations before income taxes

(115,535

)

(1,803

)

25,304

136,303

15,056

-

174,860

59,325

Provision (benefit) for income taxes

(13,882

)

(709

)

9,957

53,635

5,925

(35,169

)

33,639

19,757

(101,653

)

(1,094

)

15,347

82,668

9,131

35,169

141,221

39,568

Noncontrolling interests

(21,274

)

-

(320

)

-

-

-

(320

)

(21,594

)

Income (loss) attributable to Kindred

$

(122,927

)

$

(1,094

)

$

15,027

$

82,668

$

9,131

$

35,169

$

140,901

$

17,974

Diluted earnings (loss) per common share

$

(1.41

)

$

0.20

Diluted shares used in computing earnings (loss) per common share

87,297

87,956

Six months ended June 30, 2016

Charges

Gentiva

Business

transaction

Before

As

interruption

Litigation

Impairment

Research and

Debt

Restructuring

and

charges

reported

settlements

contingency

charges

development

amendment

charges

integration

Total

(“core”) (a)

Income from continuing operations:

Segment adjusted operating income:

Kindred at Home:

Home health

$

142,971

$

(1,309

)

$

-

$

-

$

-

$

-

$

-

$

-

$

(1,309

)

$

141,662

Hospice

56,195

-

-

-

-

-

-

-

-

56,195

199,166

(1,309

)

-

-

-

-

-

-

(1,309

)

197,857

Hospital division

263,926

-

-

-

-

-

-

-

-

263,926

Kindred Rehabilitation Services:

Kindred Hospital Rehabilitation Services

98,848

-

-

-

-

-

-

-

-

98,848

RehabCare

13,399

-

-

-

-

-

-

-

-

13,399

112,247

-

-

-

-

-

-

-

-

112,247

Support center expenses

(140,466

)

-

-

-

3,939

1,103

-

-

5,042

(135,424

)

Litigation contingency expense

(2,840

)

-

1,775

-

-

-

-

-

1,775

(1,065

)

Impairment charges

(13,919

)

-

-

13,919

-

-

-

-

13,919

-

Restructuring charges

(2,037

)

-

-

-

-

-

2,037

-

2,037

-

Transaction costs

(3,531

)

-

-

-

-

-

-

3,277

3,277

(254

)

Building rent

(133,010

)

-

-

-

-

-

-

-

-

(133,010

)

Equipment rent

(21,369

)

-

-

-

-

-

-

-

-

(21,369

)

Restructuring charges - rent

(713

)

-

-

-

-

-

713

-

713

-

Depreciation and amortization

(66,752

)

-

-

-

-

-

-

-

-

(66,752

)

Interest, net

(114,820

)

-

-

-

-

-

-

-

-

(114,820

)

Income from continuing operations before income taxes

75,882

(1,309

)

1,775

13,919

3,939

1,103

2,750

3,277

25,454

101,336

Provision for income taxes

28,261

(634

)

(473

)

6,746

1,909

534

(3,538

)

1,588

6,132

34,393

47,621

(675

)

2,248

7,173

2,030

569

6,288

1,689

19,322

66,943

Noncontrolling interests

(16,698

)

-

-

(1,016

)

-

-

-

-

(1,016

)

(17,714

)

Income attributable to Kindred

$

30,923

$

(675

)

$

2,248

$

6,157

$

2,030

$

569

$

6,288

$

1,689

$

18,306

$

49,229

Diluted earnings per common share

$

0.35

$

0.55

Diluted shares used in computing earnings per common share

87,374

87,374

__________

(a)

During the first quarter of 2017, the Company revised its
definitions of “core” non-GAAP measures. See “Non-GAAP Measures”
beginning on page 14 for a discussion regarding the revised
definitions. For comparability, core results for 2016 have been
revised to conform to the current year presentation.